Remember back in 2004 / 2005 when the market was red hot and if you owned a home you were constantly receiving solicitaions to refinance your existing mortgage into an low interest ARM? The come ons were all the same: Cash Out Your Equity - Pay Off Credit Cards - Take A Vacation - Remodel Your Kitchen/Bath. Nobody believed that the market value of their home was so off and was also no way that when the market corrected itself the amount they had mortgaged would be more than the home's value.
Unfortunately for many homeowners lured into borrowing cheap, low interest money, that is exactly what has happened. From the Consumerist - Subprime Meltdown: Doomsday Coming in October For The Subprime Mortgage Industry
Many consumers who signed up for adjustable rate mortgages in 2004 and 2005 will see their mortgage payments jump this October, according to CNNMoney. With foreclosure rates already as high as one foreclosure filing for every 656 households in the US, this can't be good news.
From CNNMoney:
"In October alone more than $50 billion in ARMs will reset," according to Mark Zandi, chief economist and co-founder of Moody's Economy.com. That's a record, according to Zandi.
So, what exactly will happen to the more than two million homeowners whose ARM's will reset in October?
A buyer in 2005 with poor credit and limited means might have signed on for a $200,000 2/28 hybrid ARM, locking in a fixed rate of 4 percent for two years. After paying $955 a month, his bill would now be set to spike to $1,331, a 39 percent increase.
The chief economist for the Mortgage Banker's Association estimates that about 600,000 of these homeowners will get into trouble, and about 300,000 of them will lose their homes. How did this happen?
"There were increasingly poor quality loans made starting in the spring of 2005," he said, "with the poorest of all made during the fall of 2006."
Lenders approved many borrowers who had little chance of being able to afford the payments two and three years out. They approved applications without any proof of income or assets ("liar loans") and others that barely could make the low teaser-rate payments. Some borrowers chose interest-only ARMs, which left the principal of the loan untouched
For an insider's look at the shady techniques subprime lenders used to foist ARM loans on unsuspecting people who did not know they couldn't afford them, check out this story from NPR about mortgage lender Ameriquest.
If you are a homeowner who has an ARM that already has, or is about to reset to a higher interest rate, and you do not have enough equity to refinance, talk to us about possible solutions that will prevent foreclosure and ruining your credit.
Technorati Tags - ARM : Subprime : Mortgage : Foreclosure : Credit
The latest government bail out proposal reminds me a bit of Seinfeld. It is expected that the President will announce that the government has struck deals with some of the larger lending institutions where they will freeze the teaser rates *on some* of their subprime mortgage loans. Not everyone with an ARM that is about to rest will have their low introductory rate frozen for the next 5 years though.
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ARMs gained popularity in 2003 and remained in high demand during the boom years when residential real estate market experienced unparalleled appreciation.
